Song Corporate Finance Chapter 1
Introduction to Corporate Finance
1. Two Questions: what investments should the corporation make and how should it pay for those investments?
a. Investment decisions involve spending money and financing decisions involving raising money
b. Concepts govern good financial decisions
c. Financial managers value the shareholders’ investment opportunities outside their company because of the opportunity cost of capital contributed by shareholders
d. All managers and employees need to pull together to increase value
2. There are five themes that return throughout the book:
a. Corporate finance is all about maximizing value
b. The opportunity cost of capital sets the standard for investment decisions
c. A safe dollar is worth more than a risky dollar
d. Smart investment decisions create more value than smart financing decisions
e. Good governance matters
3. Corporate Investment and Financing Decisions:
a. Real Assets: need to be paid for by selling claims on them and the cash flow they will generate
b. Financial Assets or Securities: claims on real assets and the cash flow they will generate
c. Securities include bonds, shares of stock, and a dizzying variety of specialized instruments
d. Investment Decision: purchase of real assets
d.i. Capital Budgeting: capital expenditure (CAPEX) decisions because most corporations prepare an annual capital budget listing the major projects approved for investment
d.ii. Intangible assets are also part of the investment because they can build brand recognition and reputation
d.iii. Longer company has to wait for cash inflow the greater the inflow required to justify the investment
d.iii.1. Thus timing of inflows is important
e. Financing Decisions: sale of financial assets—shareholders are equity investors who contribute equity financing
e.i. Capital structure decision is the choice between debt and equity financing
e.ii. Capital refers to the firm’s sources of long-term financing
e.iii. Debt financing
1. Two Questions: what investments should the corporation make and how should it pay for those investments?
a. Investment decisions involve spending money and financing decisions involving raising money
b. Concepts govern good financial decisions
c. Financial managers value the shareholders’ investment opportunities outside their company because of the opportunity cost of capital contributed by shareholders
d. All managers and employees need to pull together to increase value
2. There are five themes that return throughout the book:
a. Corporate finance is all about maximizing value
b. The opportunity cost of capital sets the standard for investment decisions
c. A safe dollar is worth more than a risky dollar
d. Smart investment decisions create more value than smart financing decisions
e. Good governance matters
3. Corporate Investment and Financing Decisions:
a. Real Assets: need to be paid for by selling claims on them and the cash flow they will generate
b. Financial Assets or Securities: claims on real assets and the cash flow they will generate
c. Securities include bonds, shares of stock, and a dizzying variety of specialized instruments
d. Investment Decision: purchase of real assets
d.i. Capital Budgeting: capital expenditure (CAPEX) decisions because most corporations prepare an annual capital budget listing the major projects approved for investment
d.ii. Intangible assets are also part of the investment because they can build brand recognition and reputation
d.iii. Longer company has to wait for cash inflow the greater the inflow required to justify the investment
d.iii.1. Thus timing of inflows is important
e. Financing Decisions: sale of financial assets—shareholders are equity investors who contribute equity financing
e.i. Capital structure decision is the choice between debt and equity financing
e.ii. Capital refers to the firm’s sources of long-term financing
e.iii. Debt financing